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2011

 

At this week’s Supply Chain World North America conference, Nick Little, Assistant Director, Executive Development at Michigan State University reminded the audience of the critical importance of any company to invest strategically in innovation and supply chain capability, even in the dark stages of a global recession. He reminded us that in July 2008, prior to the occurrence of the global financial crisis, Volkswagen decided to make a $1 billion commitment to U.S. resident manufacturing, and maintained that commitment even after the U.S. auto market collapsed in 2009/2010.

 

This week, Volkswagen conducted the grand opening of its new automobile assembly plant located in Chattanooga Tennessee, a plant which could employ 2000 workers and designed to produce upwards of 300,000 vehicles per year.  Volkswagen’s motivation to build a U.S. presence was to become more competitive in the North America market, and also buffer the current negative effect of currency fluctuations incurred by cars exported to the region.  The primary model for manufacture will be the Passat, and Volkswagen will aggressively price the new U.S. manufactured version of the Passat at roughly $7000 less than the current model.  The Passat was designed to compete head-to-head with the Toyota Camry and Honda Accord in the U.S.  As fate often plays out, both Toyota and Honda are struggling to recover from the March earthquake and tsunami that devastated northern Japan, and U.S. inventories of Camrys and Accords are at all time lows.

 

Volkswagen stands to benefit from more than $570 million in state and federal governmental incentives, and has designed the new plant for maximum efficiency. Up to 85 percent of parts will be source from nearby suppliers, eight of which are located on site to insure just-in-time delivery of parts.  The Wall Street Journal also noted that the average wage level estimated to be $27 per hour is the lowest of all current auto manufacturers with presence in the U.S.

 

Volkswagen is not the only company that maintained an investment in innovation supply chain capability during the past downturn.  We have previously noted on Supply Chain Matters how the specialized Mittelstand mid-market companies located throughout Germany utilized the recession to invest in more product innovation and production capability, and have been the first to benefit from the current boom of demand from emerging markets. These companies have a relentless focus on market niches, areas where bigger companies chose not to compete, and also in areas that demonstrate steady growth. German exports to China increased 45 percent in the first ten months of 2010, while other countries struggled.  While companies in the U.S. were quick to shed experienced workers, Germany’s industrial and legislative leaders pulled together to come up with innovate means to retain workers and prepare for the recovery.

 

Yesterday at a subsequent presentation at the conference, Alan D. Wilson, the CEO and President of McCormick & Company Inc., a global producer of spices and flavorings, proudly noted that during the recession, his company continued to invest in people and benefits, and that has paid off with a consistent track record of 4-6 percent sales growth and consistently exceeding Wall Street expectations.  McCormack continues to have a strong belief in continuous innovation and investment in supply chain capability.

 

Management books and business case studies often point to specific companies who were able to be best prepared to take advantage of a business upturn cycle, often disrupting existing industry participants.  It seems to us that a common trait was not so much growth by acquisition, but rather growth by consistency and follow-through in understanding customer needs, maintaining innovation and value-chain capability.

 

How many of today’s CEO and Wall Street players really understand this tenet?

 

Bob Ferrari

 

There is a rather timely debate and discussion occurring within our community that reflects on the S&OP (sales and operations planning) process and its interaction with IBP (integrated business planning).  In a recent posting on The 21st Century Supply Chain blog, Trevor Miles of Kinaxis puts forth an argument that for many manufacturers, the annual budgeting process is broken, and rather than a static mechanism, should rather be a continuous process driven by a consensus operations forecast, namely the S&OP process. Trevor brings forward a number of evidence points to support his argument, which readers can review and comment upon.

 

I thought I would take a slightly different perspective and reflect on what has been occurring across North American and global supply chains thus far in 2011, and reflect on whether a static annual budget would still serve as a barometer as we reach the half way mark of 2011.

 

To begin, we should set some context among supply chain operations and financial teams.  As we began 2011, Supply Chain Matters noted that the two significant global supply chain management challenges in 2011:

 

1.      1.  Exploding inbound material costs which could prove difficult to offset by higher prices of further cost reductions.

 

2.      2.  Rapidly changing markets and market dynamics forcing many supply chains to be more agile and responsive to explosive demand coming from emerging regions or hot product sectors.

 

On the financial side, many global manufacturers, while experiencing fatter profit margins, declared top-line revenue and market share growth as a key 2011 objective.  Annual budgets were set accordingly.

 

To provide a contrast of what can happen in just four months, we can reflect on two reports: The Institute of Supply Management (ISM) Semiannual Economic Report released this month, and the HSBC Purchasing Managers Index for China released in April.

 

The ISM economic outlook predicts that manufacturing growth among U.S. manufacturers is much better than expected.  The majority of respondents predicted revenues will be 13.2 percent higher in 2011.  In December, these same respondents predicted a 5.6 percent increase in 2011 revenues.  In four months, revenue expectations have more than doubled.  In terms of capacity, purchasing and supply managers report a current level at 83.2 percent of normal capacity, 3 percentage points higher than December, and coming close to capacity levels achieved in December 2006. In December, manufacturers were planning a 5.2 increase in capacity for 2011, but that capacity is now expected to increase to 8.1 percent for the remainder of this year.  Significant changes in a matter of months.

 

Turning to China, the manufacturing engine of the global economy, respondents note a lackluster growth in new business, a decrease in export orders, and a slower expansion of manufacturing production. Further noted is that manufacturers are cutting back on purchases and inventory noting a subdued rate of new order growth. Manufacturers in China and the U.S. are managing different business needs as well as different operating assumptions that are changing by the month.

 

Other key changes noted on both the U.S. and China reports are indeed rapidly increasing inbound prices and mounting parts shortages.  With the U.S., purchasing managers anticipated a 2.7 percent increase in prices in December, and have now noted that actual price increases have doubled to reflect on average, 6.1 percent increases. The majority of purchasing respondents now expect prices to increase 9.1 percent compared to end of 2010 levels.  Similar price increase concern is also reflected in the China. report. ISM specifically asked respondents what percentage of inbound material costs increases could be realistically passed along in higher prices.  The response was an average 34 percent, meaning the remaining portion would have to be offset by other factors. Earlier this year, senior managers might have been more optimistic regarding a strategy of offsetting costs with price increases.

 

At the beginning of this year’s budgeting cycle, nobody could have predicted a major earthquake and tsunami hitting Japan, and its subsequent impact on industry supply chains.  Both the U.S. and China reports make mention of initial indicators of impact and consequent parts shortages occurring.  ISM noted 23 percent of manufacturers anticipating that they will experience some supply chain related delays as a result of the Japan impact.

 

Our point in highlighting just these two examples of data is that business assumptions are indeed changing at a much more rapid rate.  The data and assumptions made just four months ago regarding key aspects of production, capacity, costs and availability are changing constantly, along with unforeseen events such as the earthquake in Japan, floods in the U.S. Midwest, or other natural catastrophes to come.  They all, at least in our view, reinforce thinking that budgets and operating plans will never be static and will always be changing. 

 

Ultimately, the rapidly changed clock speed of business has impacted the iterations of the business planning and S&OP processes, and the sooner senior management and cross-functional teams acknowledge this, the better we can all move on toward determining the best means to manage needs for a much more flexible business planning and supply chain response management process.

 

Bob Ferrari

 

 

Community readers may recall a certain TV commercial that features a group of suited professionals that are discussing a rather complex or difficult problem, with one of the actors always noting that its time to call-in an expert, it is time to call BDO. If you do not recall these commercials, you might recall BDO’s familiar marketing tag line: ‘People Who Know, Know BDO.

 

With this backdrop, I took notice to a BDO press release this week (tip of the hat to Lauren Bossers, Community Facilitator) which notes that supply chain issues represent one of the most prominent risks to U.S. technology companies.

 

Of the100 of the largest publically traded technology companies analyzed, 86 percent stress supply chain concerns, noted as supplier relations, distribution and material costs, as a top risk factor.  This number represents a 15 percent increase in this sentiment from a year ago.

 

Keep in mind that the targets of this survey were senior financial and corporate executives, executives who have generally called for continual cost reduction across supply chain functional areas these past few years.

 

Glancing at the table outlining the top 20 risk factors, it is rather stark as to how many of these risk factors have a direct impact on the supply chain.  Also take note of the risk factors that had the highest percentage increase for concern in just one year: (2010 to 2011)

 

·         Natural disasters, war, conflicts and terrorist attacks- 26 percentage point increase

 

·         Inability to maintain operational infrastructure and systems- 26 percentage point increase

 

·         Predicting customer demand and interest- 22 percentage point increase

 

·         Cyclical revenue and stock fluctuation- 13 percentage point increase

 

 

Translating these concerns to supply chain business process support needs, one has to target supply chain risk mitigation, business continuity, sales and operations planning (S&OP) and more responsive planning as the key looking glass areas for 2011.

 

Earlier this year, an Accenture study uncovered a trend indicating that business responsibilities for CFO’s was expanding into other broad business areas, including risk, customer service and yes, supply chain management.  That study also characterized CFO’s as seeking more flexibility in planning and forecasting, as well as a need to update process, data and IT systems. Also mentioned was workforce centralization.

 

We noted in our recent Supply Chain Matters Quarterly Newsletter that now, more than ever, is the time for supply chain teams to seek more alignment and influence with the CFO and CEO.  There is both good, and not so good aspects to this advice.  On the good side, senior executives seem to now have a far deeper understanding on the relationship of certain supply chain capabilities to business strategy and outcomes.  If your team was holding back on pitching investment plans on the key processes noted above, now may be the best time to communicate these plans.

 

On the flip side, the notion of supply chain functional stovepiping, where areas such as planning, procurement, operations and product management focus on different goals and metrics will no longer be tolerated.  We may be fast approaching an era of single accountability for supply chain initiatives and activities that directly impact required business outcomes. That may include risk mitigation, integrated business planning and operations management.

 

Supply chain developments in the high tech sector are often the early indicator of broader industry initiatives, and both of these studies reflect rapidly changing perspectives at the top of the house.

 

What about your organization?  Are your senior executives voicing these same concerns and perspectives?

 

Bob Ferrari

 

In a May 2nd, First Thing Monday commentary, Gartner VP and Distinguished Analyst Jim Shepherd penned a commentary titled Software Acquisitions Are Back, and No Longer Scary.  (free sign-up or client paid access required). 

 

Jim opines that consolidation and acquisitions among software industry players has returned to its pre-recession, boom times pace, and with more than 30 years of industry involvement, is struck by how nonchalant the industry has become about these transactions.  Where these events were once a big deal for the players and their respective customers, Jim feels that these days, no one gets excited. “It’s just considered business as usual.”

 

Jim comments that customers have learned that there is little they can do about these events, other than to change the address of where to send the maintenance check.   More concerning, he notes that in many current deals, maintenance revenue and the customer base are much more important to the acquirer than the actual applications. Jim states: “The simple fact is that most acquisitions are just about getting bigger, and having more things to sell and more customers to sell them to. Software executives and their private equity backers realize that size is much more important than architectural elegance or product coherence.”

 

My response: what a sad state for the industry when growth and individual interest needs outweigh the needs for technology innovation and actually supporting customers.

 

We can all reference a past company or industry that saw its demise because it lost all focus on its prime existence, namely delighting customers and fulfilling their needs vs. solely those of its investors.  After all, who are these bigger players actually acquiring? They acquire to springboard innovation, fill a strategic hole in the portfolio, or have an instant broader industry or geographic presence.

 

The software industry itself has its genesis in smart and savvy entrepreneurs who developed a better way for technology to solve business problems, particularly in supply chain, procurement and operations management.  Companies such as SAP, Oracle or Microsoft came from ideas generated by a small group of innovators with ideas focused on solving customer business process management needs. Many smaller best-of-breed software providers exist in the supply chain domain because they offer innovation or a smarter, more cost-effective alternative. In our view, customers will always value innovation, especially when the ROI is compelling.

 

Do not misinterpret my opinion, investors do need to be satisfied, but not to the detriment of customers. Today, our supply chain community is much more savvy as to technology trends, buying cycles, and ‘how to work a vendor’. 

 

On the specific subject of software maintenance, assumptions that customers will continue to pay the freight are also short-lived and fleeting. The ‘voice of the customer’ is already being heard in this area, witness recent events at SAP. Cloud computing models will ultimately make maintenance a short lifecycle.

 

Those of us who have been involved with software for a long time can well remember past days of lavish customer conferences, renting of yachts and golf courses to impress customers. Those days are a memory.  However, smaller, innovative vendors who go the extra mile to support unique customer needs should not be a memory of the past but rather a key to continued industry renewal and success. After all, who would have conceived that real-time, in the moment communicating to others in 140 character messages would gain such acceptance to equate to a company estimated to be worth billions.

 

Jim Shepherd’s premise is that as the software industry continues to mature, the winners will be much larger companies providing global coverage, more resources and extensive collections of applications and services.

 

I’d like to think that there will instead be a continued need for the co-existence of best-of-breed innovators who will continue to drive innovation and industry progress. In the end, customers should always be the final judge of value and success.

 

Bob Ferrari